Harvard University economists Carmen Reinhart and Kenneth Rogoff acknowledged today that they had made a mistake in a 2010 paper that has been used to justify fiscal consolidation in the U.S. and Europe, while arguing that the error didn’t change the basic findings of their research.
The paper, “Growth in a Time of Debt,” concluded that countries with public debt in excess of 90 percent of gross domestic product suffered measurably slower economic growth. It has been cited by U.S. House Budget Committee Chairman Paul Ryan and European Union Economic and Monetary Affairs Commissioner Olli Rehn in defense of efforts to drive down budget deficits.
The Harvard professors said they had inadvertently left some data out of their calculations in the study.
“It is sobering that such an error slipped into one of our papers,” they said in an e-mail. “We do not, however, believe this regrettable slip affects in any significant way the central message of the paper.”
The e-mail came in response to a study released on April 15 by a trio of economists from the University of Massachusetts at Amherst charging that the Reinhart-Rogoff work contained “serious errors that inaccurately represent the relationship between public debt and growth.”
The new study -- by Ph.D. candidate Thomas Herndon and professors Michael Ash and Robert Pollin -- said that the Harvard economists excluded some data and unconventionally weighted the statistics they included to reach their conclusions.
In defending their work, Reinhart and Rogoff pointed out that the University of Massachusetts study also finds “lower growth associated with periods when debt is over 90 percent.”
Ash said in a telephone interview yesterday that his paper does show “a modest diminishment of growth” in countries with big debts yet nothing like “the stagnation or decline” seen in the study by Reinhart and Rogoff.
The University of Massachusetts paper grew out of homework assignment by Ph.D. student Herndon in which he attempted to replicate the results of the research by Reinhart and Rogoff. Herndon received an A in the course, Ash said.
Ryan, a Wisconsin Republican and former vice presidential candidate, pointed to the work by Reinhart and Rogoff in his 2013 budget, “The Path to Prosperity: A Blueprint for American Renewal.”
“Essentially, the study confirmed that the massive debts of the kind the nation is on track to accumulate are associated with stagflation -- a toxic mix of economic stagnation and rising inflation,” the blueprint said.
Ryan’s 2014 budget, introduced earlier this year and subsequently passed by the Republican-controlled House, would eliminate the budget deficit over the next decade.
The Senate has approved its own 2014 budget, and leaders on both sides have rejected the other chamber’s work.
Federal debt amounted to 104 percent of GDP in the fourth quarter of last year, according to calculations by the Federal Reserve Bank of St. Louis on its website. Debt held by the public, which excludes securities issued to the Social Security Trust Fund and other government entities, was equivalent to 73 percent of the economy.
The EU’s Rehn also has used Reinhart and Rogoff’s results to make the case for fiscal consolidation on the continent.
“Serious empirical research” shows that public debt above 90 percent of GDP “acts as a permanent drag on growth,” he told an International Labor Organization meeting on April 9.
French President Francois Hollande has led a backlash against austerity in Europe since his election in May 2012. Hollande’s government today said it will defy an EU order to bring the budget deficit below 3 percent of GDP this year, targeting a 3.7 percent shortfall instead.
The study by the economists from the University of Massachusetts at Amherst looks at a subset of countries considered by Reinhart and Rogoff in their paper -- 20 advanced economies from 1946 to 2009 -- and argues that group is most relevant to the current policy debate in the U.S. and Europe.
After adjusting for what they called the errors in the Reinhart-Rogoff paper, Herndon, Ash and Pollin found that countries with debt more than 90 percent of GDP grew an average 2.2 percent per year. Reinhart and Rogoff said countries in that group saw GDP shrink on average by 0.1 percent.
Herndon, Ash and Pollin attributed the different results to spreadsheet errors, “selective exclusion of available data” and unusual weightings of the statistics by the Harvard economists.
Reinhart and Rogoff acknowledged to making a spreadsheet mistake, while taking issue with the other criticisms.
The findings by Reinhart and Rogoff “have served as an intellectual bulwark in support of austerity policies,” the University of Massachusetts academics said. The fact that their results “are wrong should therefore lead us to reassess the austerity agenda.”